Private Equity Emerges From the Shadows

Today, regular Joe and Jane investors want the potential to share in the impressive returns that private equity has historically provided to endowments, foundations, pension funds and other institutional investors. Past is not prologue, of course, but private equity’s track record puts it among the best-performing asset classes. The Cambridge U.S. Private Equity Index, a well-known index for this asset class, shows a $1,000 initial investment made in April 1986 rising to $39,852 as of September 2014. Over the same period, the same $1,000 investment in the S&P 500 Total Return Index would have been worth only $15,914, according to Cambridge Associates. Perhaps more noteworthy is that this outperformance was accomplished during the tech wreck and Great Recession.

When you think about it, most public companies started out as privately held companies. Getting access to these companies earlier in their growth curve could be very attractive, and there are tens of thousands of large privately held companies that a private equity firm could theoretically buy. To put the opportunity into perspective, the number of public companies represents only 19% of the total number of U.S. private companies with 500 or more employees. Assets are flowing into private equity as the search continues for returns in today’s low-yield environment. There are nearly 6,000 active private equity firms with $1.1 trillion globally waiting to be deployed as of the end of 2014, according to Bain & Company’s “Global Private Equity Report 2015.”

Times are changing. Private equity was previously reserved for the select few. Today, however, the possibility of higher returns and potential diversification benefits of private equity are becoming available to a greater number of investors.

As with all alternative investments, private equity is not suitable for everyone. As always, we are reminded that past performance is not indicative of future results. There is no guarantee that any investment will achieve its objective, generate profits or avoid loss. Private equity funds involve the risk of loss of principal and should be considered speculative. An investment in private equity is subject to liquidity risks and volatility. Still, done right, underperforming companies could be the retail investor’s next find.